Among the many travails being faced by our honourable finance minister Nirmala Sitharaman nowadays is the furore caused by her recent announcement of the zero merchant discount rate (MDR) policy for payments through RuPay debit cards and Unified Payments Interface (UPI) instruments. This policy dictates that when a consumer pays a merchant using RuPay or UPI, the bank may not charge the merchant a commission on the sale value that it usually charges a merchant, say, on a credit card transaction. Critics of this policy lament that it would begin to reverse the progress India has made in recent years to expand the digital payments network.
The debate over zero-MDR is one twist in a grand tale that dates back to 2008, when the National Payments Corporation of India (NPCI) was set up as an umbrella organization for operating retail payments and settlements in India. In 2016, NPCI introduced UPI, which has since registered 100 million users and now clocks more than 1 billion transactions every month.
According to the NITI Aayog, mobile payments in India are expected to grow nearly 20-fold to $190 billion in the next three years. Of the nearly one billion mobile phone users in India, smartphone users barely outnumber feature phone users. These 420 million feature phone users can use the *99# USSD service to dial into 13 different languages, which would connect them to UPI. This brings digital payments to the common man and thus plays an important role in bringing greater financial inclusion in the country.
Yet, we are far behind, say, China, where 55% of spending is done digitally, compared to only 11% in India. While the progress made in recent years is substantial, the outlook for future growth is mind-boggling. To capitalize on this opportunity, innovation is necessary at three levels—adoption, policy and technology. A better understanding of human behaviour, technology, use cases and dis-use cases will facilitate the 10x growth necessary in adoption rates to cover the entire population. The government has the rare opportunity to develop a data-centric understanding of how the economy conducts itself and uses money, and can set taxes accordingly. At the technology level, there is an opportunity to use voice as a means for authentication and conduct transactions across multiple local languages. Copious amounts of data from payment transactions can be analysed to understand user needs and develop personalized loans and financial solutions at scale.
Interestingly, the opportunity is not national in scope. Rather, it is global. The NCPI is gearing up to take UPI to other countries, beginning with Singapore and the United Arab Emirates. The low hanging fruit is to provide payment solutions to Indians travelling abroad. However, the bigger and tougher game is to increase its usage among local people in countries outside India. This would put UPI in competition with the likes of PayPal and Skrill. Last month, Google famously suggested to the US Federal Reserve Board that they consider setting up a real-time payments system modelled on India’s UPI. For now, NCPI is working with its counterpart in Singapore, the Network for Electronic Transfers for Singapore, to bring UPI live in Singapore.
At a more abstract level, if one were to take a step back and reflect on the growth story of mobile payments, an unmissable (or unlikely, depending on how one thinks about it) parallel emerges. The Advanced Research Projects Agency Network, better known as Arpanet, was an early packet-switching network dating back to the late 1960s, which established the first ever computer-to-computer link using a protocol suite known as TCP/IP. Arpanet and TCP/IP became the technological foundation of the internet as we know it today. They did so because they facilitated the transfer of even small amounts of data to anyone, anywhere. The internet today has expanded substantially in scope and scale since those early days and supports popular use cases such as search engines, emails, video streaming, e-commerce and social media.
In a similar way, a product such as UPI facilitates the transfer of even small amounts of money to anyone, anywhere, in a manner that is easy, fast, and secure. If the Arpanet grew to ultimately become the internet, what can UPI ultimately become? What are the new business models that may emerge from such a platform? The possibilities are endless. Peer-to-peer marketplaces and the much feted and subsequently maligned “C2C" business models of the dot-com boom era could become a reality, as could peer-to-peer lending platforms, matching lenders with borrowers at an aggregate or individual level. Individual market participants could publish their personal balance sheets and income statements, as users post updates on social media today. Add to this the possibilities presented by the emergence and adoption of technologies such as blockchain, and you have a future that looks nothing like the present.
We have seen just the tip, albeit a very substantial tip, of the digital payments iceberg. In the coming years, young business leaders of today must learn to uncover the iceberg itself, and perhaps be prepared to discover that it is in fact not just a new Antarctica, but the new Wild West.
Kapil Viswanathan and Gaurav Raina are, respectively, vice-chairman of Krea University and chairman of Mobile Payments Forum of India